For most Indians, Mumbai, or Bombay as it used to be called, is the city where even the most fantastic dreams could come true. As the commercial and financial capital of India, and also the center of Asia’s largest movie industry, Mumbai is like New York and Hollywood rolled into one. Thousands of migrants move to the mega city every day, most in search of a better future, some to build their fortunes. Very few find the proverbial pot of gold at the end of the rainbow, but that doesn’t stop more from trying.
Among those who have scaled the peaks of success and fame in Mumbai, not many have made it bigger than Uday Kotak. The founder and managing director of Kotak Mahindra Bank built one of the best known institutions in India’s financial services industry and, in the process, earned a fortune currently worth over $4.5 billion.
Back in the early eighties, when Uday started his first venture, the future success that awaited him was almost unimaginable. The government’s heavy hand controlled most of the levers of the Indian economy, and regulations in the banking and financial services sector were among the most restrictive. But the 23 year old young man straight out of business school was quick to notice the opportunity in the bill discounting business, which was mostly unregulated. The government-owned banks were enjoying very large interest spreads, in providing working capital finance to businesses. Uday approached potential borrowers, including a company that was part of the well-known Tata business group, and offered them trade finance at lower rates than the banks were charging them. Then he raised capital from a group of investors, promising higher returns than they were getting from bank deposits and leveraging the reputed names on his client list.
As his bill discounting business took off, Uday started seeking opportunities in other areas of finance. Hailing from a family of commodity traders, he had no prior knowledge of banking or finance. So he roped in a senior banker with several years of experience as his partner and mentor. But it was Uday’s meeting in 1985 with another young man that proved to be the turning point in his career. Anand Mahindra, currently chairman of the Mahindra group, was enjoying the early years of his own illustrious business career when he met Kotak. Impressed by Uday’s financial skills and drive, Mahindra offered to be his partner and investor as Kotak expanded his business. The very next year Kotak Mahindra Finance was born. “ If you believe in yourself and the business, you should put your family name on the line”, Uday said in an interview to the Times of India. The addition of the Mahindra name was invaluable as it lent business credibility in the eyes of investors and clients.
When some of the foreign banks started offering car loans, almost unheard of in India until then, in the late eighties, Kotak Mahindra Finance joined them with a different model. At the time, due to limited availability, customers had to order cars and wait for months before they could get their vehicles. Kotak Mahindra would order popular cars in the company’s own name and then offer loans to customers to buy the cars without any waiting period. Soon, Kotak Mahindra became one of the major players in the car loan business, and became the joint venture partner of Ford Motor Credit in India. The company went public in 1991, and over the next few years, Kotak Mahindra steadily expanded into other segments of consumer finance as well as investment banking.
The bank of the future must have three qualities. The first is prudence. Banks should not take on excessive leverage. The second is simplicity. The bank of the future will have simpler products that rely less on derivatives. The third is humility, or a lack of arrogance. Financial services should be a business that serves the real world.
— Uday Kotak, in an interview published in bcg perspectives,
The Boston Consulting Group.
With a rapidly growing domestic business, Uday was keen to learn the workings of international finance. He was granted his wish in 1993 when he was invited to talk about opportunities in India at a dinner hosted by Goldman Sachs in Hong Kong. There he met Hank Paulson, who became Goldman Sachs CEO and later the U.S. treasury secretary. The relationship eventually led to Goldman selecting Kotak Mahindra as its partner for investment banking in India. Kotak Mahindra launched its mutual fund in 1998, expanding its basket of financial services even further.
However, competition was heating up in the banking and financial services space as deregulation by the government attracted new entrants. The Reserve Bank of India (RBI), which is also the country’s banking regulator, issued new banking licenses for the first time in decades. Uday realized that he needed to enter the conventional banking business for future growth, and in 2003, Kotak Mahindra received its banking license. Since then, the bank has steadily expanded its operations across the major cities in India, focusing on consumer lending, which is its core strength. The partnerships with Ford and Goldman Sachs ended in 2005 and both businesses were absorbed into the bank. Kotak Mahindra has been cautious in its international forays, which shielded the company from the 2008 global financial crisis and the subsequent downturn. The steady growth in consumer lending also helped offset the decline in revenues from investment banking and related segments. Though its branch network is smaller than most of its competitors, the bank has so far maintained superior operating margins.
But there could be more competition around the corner as the government is set to issue new banking licenses and foreign banks expand further in India. As part of its efforts to ensure diversified shareholding structures for India’s banks, the RBI has asked Uday Kotak to reduce his current holdings of over 40% in Kotak Mahindra Bank to 20% by 2018. Uday, who has repeatedly stated that he would have failed if he had not build an institution that would endure, is unlikely to be unduly perturbed by these challenges. The single-minded focus on gaining and retaining trust, by reducing conflicts of interest and upholding high standards of business integrity, has been the foundation on which Uday Kotak has built his success. As long as the company stays true to those principles, the bank Kotak built is likely to continue to thrive.
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© Thomas White International, Ltd. 2019